Dealing with a Materials Shortage
During the recent Precision Machining Technology Show (PMTS) the Production Machining editors spread out over the show floor to ask several materials vendors about what they see regarding the shortage of some raw materials for metalworking manufacturing. We also wanted to know if they had any suggestions for how their customers might deal with shortages ongoing.
PM: Why is there a materials shortage?
Generally, the vendors we spoke with told us similar tales as to the genesis of the shortage. The mills cut back in 2008 and 2009 and have been slow to increase capacity to previous levels.
Jim Roach, Tri Star Metals
Executive V.P., Tri Star Metals
Carol Stream, Illinois
In anticipation of shortages, we are sitting on the largest inventory position ever. We have seen the value of that strategy come to fruition as leadtimes have been extended. As a stainless and nickel alloy distributor, we have definitely seen the mills pushing deliveries out in 2012—some as far as March of that year.
Demand has increased, but the mills, running at their current capacity, are still below what they could be. Basically, they seem to be waiting for signals of sustained volume well into next year before they optimize their production capacity. If and when additional capacity comes on line, leadtimes will shorten, but we believe that will likely not occur until 2012.
The mills are trying to manage their businesses prudently—it’s a more complicated process than simply flipping a switch to bring on additional capacity. After the rapid downturn of the recession, the mills are not going to jump into anything they perceive might be a blip. They are looking for sustained demand.
V.P. Sales & Marketing, Schmolz + Bickenbach
Craig Hawkins, Schmolz + Bickenbach
Carol Stream, Illinois
I think it extends from back in 2009. Prior to that, mills carried heavy inventory. After 2009 the mills basically got out of warehousing and holding of materials in inventory. They are now into the production for orders even to the point that some mills are specifying that orders are not cancellable. What took place was a reduction of workforce because the recession has forced mills to run at lower capacity even in the face of higher demand. In our case, we are producing more for order and less for inventory.
Giulio Girivetto, Cogne
Giulio Girivetto, Cogne
Ramsey, New Jersey
I believe there is not so much a shortage of material, but rather a shortage of raw material related to raw material cost. Today, we are talking about stainless steel long products, and the mills are really busy because they are coming from a period where everybody reduced production and people. Now that the market has started back up again, the mills have not caught up with production levels of 2007 and 2008 to meet the demand.
There is a shortage for certain grades and certain materials, but there are other materials that have been less affected by shortages. I think the materials market is at about 80 percent of what it was in 2008.
John Collins, Stainless and Aluminum Inc.
We’ve lost a number of mills. There have been consolidations. In aluminum, mills are being selective in what they will make because they are so busy. My foreign mill is so busy that it’s overbooked. India has lit up and so has Russia. Since our dollar is weak, they are making big money in these markets, so why ship it here? They understand they need to keep their foot in the door here, but I think it’s a capacity issue, and a where to do business decision by some of the mills that are driving much of the shortages.
Dean Mora, Concast Metal Products
Sales Representative, Concast Metal Products Co.
From a national basis, and for our usage, we see there is definitely a shortage. But with the advent of Wall Street treating the coffer as the commodity it is now, some will question in some ways if it is a true materials shortage, or if it is somehow being manipulated. We think there is a little bit of manipulation. But we don’t think the Chinese market is taking as much out of the U.S. as it has in the past. We notice, for our usage, the scrap from different providers is definitely hit and miss; it’s much harder to come by. People tend to hoard the scrap more than in years past to keep the price driven up. So, is there a true shortage of material right now? It’s market-driven/market-controlled, as opposed to a true shortage.
John Kenefick, Corey Steel Co.
V.P. of Marketing and Sales, Corey Steel Co.
It depends on the market that the material is going into and what grade of material is being purchased. Over the last 15 years, a number of changes have taken place with regard to the base metal producers, where they’re located and how they make the materials, whether they’re from Europe, South America or North America. A lot of the grades that were easily secured in this country aren’t being made here anymore with the shutdown of the various steel mills.
Currently, 12L14 hot rolled barstock is only being made by two companies in the U.S.: Arcelor Mittal and Republic. The whole landscape is changing with regard to how steel is made, and in certain cases, it’s changing because certain companies have decided to produce only selected grades of steel. Arcelor Mittal, for example, produces 12L14, but they’re not making any 11Ls, 86Ls or 41Ls. The whole landscape has changed, making it harder and harder to find producers and reliable availability of the unique grades of steel.
Sales Manager, New Dimension Metals Corp.,
Mike Mulligan, New Dimension Metals Corp.,
The current shortage in the steel bar market can be attributed to several factors including the cautious approach of the steelmakers to bring back all of their capacity. As production picks up for the end user, inventory is quickly consumed, and there is a lag time for melt and rolling capacity to be brought back in line. First, the decisions to respond have to be made, and then additional time and resources have to be spent by the producing mills. In the meantime, demand continues to increase and then it becomes a battle to keep our customers supplied.
We have to be creative. We have to keep within the sources that we’re comfortable with. We don’t want to start branching off into crazy areas. But we do have to look at all available options on things. We’ve gone to the extreme of turning down larger size materials and drawing it to the finish size for the customers. Of course, if it’s an item that perhaps we had an excess of anyway, it works well all around. We can move some old inventory, and we can take care of the emerging need. But there aren’t a lot of options. You can only go to a certain number of mills for some of these commodities, and pretty much all you can do is wait on them.
PM: What kind of strategy should shops pursue in the current environment?
Most of the companies we talked to agreed that the best strategy is establishing or maintaining a close relationship with the supplier community. Basically, this translates into more transparent communication between the shop and vendor. For example, being forthcoming as to projected business levels further out than usual will help the vendor plan its buying from the mills so shortages can be mitigated somewhat.
I’d say the first thing is to be as close as you can to your suppliers. I don’t think it’s a good time to buy a great deal of metal and lock in at a firm price at these levels. There still is the possibility that the dollar may strengthen, and some new nickel sources may come on line so prices may flatten or go down. Although volume may be higher in 2012, prices could be lower, which would be an interesting concept.
But being assured of having availability of material and having someone you can count on means it’s important to firm up your alliances now and get people on board. The more information our customers share with us, the better supplier we can be. We can’t anticipate their need if we don’t know what is going on. It is sometimes a painful conversation for my company, but there are occasions in this environment we will pass on 100 percent of a customers business in favor of advising them to spread the risk among other suppliers. To be a good partner for the customer, I think you have to accept some competition. Transparency is cornerstone for the alliance and partnership between supplier and customer.
The more we can know and the further out we can project tonnage demand, the sooner the mills will feel comfortable that there is enough sustained demand to add capacity. It’s not about locking down the price because that will float; it’s more about sharing anticipated material requirements to assure sustained supply. More notice is better, so the material won’t run out.
What we are trying with our primary customers and those smaller shops feeling the same pain as our larger customers, is to direct them into our A/B items, which are our biggest movers and more likely to be run more often. We also try to find alternate sources of supply for certain products as long as they are up to our quality standards. We try to sit down with our customers to discuss consistency of their needs ongoing so that we can plan to have material to the customer when they need it.
Machine shops need to look further out for their material needs. Better forecasting by the customer will result in better delivery from the supplier. I never recommend to shops that they use a single vendor. Multi-sourcing, especially in today’s environment, is the better tactic.
I suggest to the shop that when they need material, and it has too long a leadtime, they should ask what we suggest for the next available size. Or, is there a size above the specific diameter that we can grind down for them to get usable material when they need it? I also ask if there is an alternate grade that might be substituted. In other words, think outside the box when searching for material during this shortage.
I believe that we need to not panic. The material is coming. However, because the leadtime is longer than normal, it’s important to do better planning for your production material needs. Planning production more carefully is the best suggestion I can give customers who are experiencing material shortages. Having an idea of what is coming from the customer allows us to better organize ourselves.
In my opinion, everything is driven by the price. Right now, prices are going up because of energy, raw materials and transportation. Also, the amount of scrap available for re-melting is lagging the upturn in metalworking. Much less scrap (chips) was produced in 2009, so its scarcity may be playing a factor. I believe 2011 is going to be a good year like 2010, and I believe 2012 will be good as well. We don’t believe the mills will add capacity in the near term. Our strategy is to be fully booked with a 10-percent cushion to hedge against fluctuations in demand. I believe this is the time to not be afraid to buy and that the price fluctuations are here to stay. Call it the “new normal.”
My advice to customers is to have a dependable base supplier that they can count on and who will hold inventory for them so they have safety. What I do, and other suppliers, too, I’m sure, is if leadtimes for a material are 3 months, I hold 4 months in inventory to protect my customer. Of course, my customers need to give me orders or at least what they expect to be producing.
I don’t think business for my customers is going to back off. We project that this year will be good, but there will be a softening in the fall with a dramatic upturn in October. I am planning on 2012 to be a boom year, which is driving me to get inventory in place to be ahead of the curve. I’m working with my customers to buy aluminum ahead a year, even a quarter on the belief aluminum will increase in price during the contract period. If aluminum skyrockets, they are protected. Of course, they ask, “What if it drops?” I tell them, “If you’re happy with the price and can make money at the price, just do it.” If they are really worried, I recommend they “forward buy” half of what they need. That way, if it goes up or down the costs cancel out. It all boils down to the long-term relationship with the customer.
With the copper commodity rising to the levels it has, our customers have less dollars available. So we find it necessary to carry more inventory and more size range and offer extended terms financially to help those customers. Holding the inventory for us has not created any problems. Unfortunately, we’re in a new realm when you can no longer base inventory decisions on past history. Up until 3 years ago, we could review the copper market and make decisions based on the ebbs and flows through the years. But that is no longer the case. We’re in a new world market. A supplier needs to look at its end users and make sure they are carrying reasonable inventories.
We will probably see more copper swings in the coming years than we ever have before, so companies need to keep a close eye on the bottom line. That’s going to be the key. When you have the opportunity and you see a slow down in the market, try to procure a little bit more material.
The best strategy is to be able to project accurately what you’re going to need a year in advance. Those who are buying very sophisticated grades of steel for certain automotive applications, for example, are being asked to do just that. Companies also need to make sure they have a synergy with their suppliers so that both are on the same wavelength with what’s going on with both the upticks and the downticks of the market. This synergy will help both parties plan accordingly, and that’s being a good supplier and a good customer. These relationships still need some improvement. In real estate, they preach location, location, location. For steel, it’s plan, plan, plan. And then work the plan.
You want to stop short of saying “buy heavy.” That’s easier said than done, and it can create multiple problems down the road if you’re hedging your buy and going out further than what you have business for. You really need to simply communicate. You can never tell your supplier enough about what demand you’re seeing. It might take some time to organize your MRP system to see what you need, and the customers might be changing their demand. It’s not that they want to change their forecast, but that’s what customers are doing. Keep the communications lines open as much as possible.
Also, they need to look at as many reliable sources as they can as well. Regardless of any preference to single-source, you should have an open mind to have a backup supplier. Again, that doesn’t mean to hedge and buy ahead, but you might want to plan purchases so that you buy mainly from your main supplier, but have a secondary supplier to fall back on.
My gut says that as we approach the summer months, the demand may flatten because of typical seasonal cycles. March and October are traditionally our two biggest months. December and summer months are the slowest. These cycles usually allow for a natural catch-up. But I believe we will be fighting some volatility in the market for a long time. I don’t see surcharges going away. I’m guessing with a little bit of a tapering effect through the slower times, maybe by 2012 or 2013, supply will come back in line with demand.
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